Earnings Call Transcript - UMH Q4 2022

Operator, Operator

Good morning and welcome to UMH Properties’ Fourth Quarter and Full-Year 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. It is now my pleasure to introduce your host, Ms. Nelli Madden, Vice President of Investor Relations. Thank you, Ms. Madden, you may begin.

Nelli Madden, Vice President of Investor Relations

Thank you very much, operator. In addition to the 10-K that we filed with the SEC yesterday, we have filed an unaudited annual and fourth quarter supplemental information presentation. The supplemental information presentation, along with our 10-K are available on the company's website at umh.reit. I would like to remind everyone that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company’s annual 2022 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements. In addition, during today's call, we will be discussing non-GAAP financial metrics. Reconciliations of these non-GAAP financial metrics to the comparable GAAP financial metrics, as well as explanatory and cautioning language are included in our earnings release, our supplemental information, and our historical SEC filings. Having said that, I would like to introduce the management with us today: Eugene Landy, Founder and Chairman; Samuel Landy, President and Chief Executive Officer; Anna Chew, Executive Vice President and Chief Financial Officer; Brett Taft, Executive Vice President and Chief Operating Officer; Jim Lykins, Vice President of Capital Markets; and Daniel Landy, Executive Vice President. It is now my pleasure to turn the call over to UMH's President and Chief Executive Officer, Samuel Landy.

Samuel Landy, President and Chief Executive Officer

Thank you very much, Nelli. UMH is making significant strides in executing our long-term business strategy through the acquisition, expansion, development, and renovation of communities. Last year, we acquired seven communities with 1,500 developed homesites for around $86 million. Additionally, through our collaboration with Nuveen Real Estate, we obtained a community with 144 developed homesites in Sebring, Florida, for $15.1 million. We also completed the development of 225 expansion sites. Normalized funds from operations for the fourth quarter were $0.20 per share, compared to $0.22 per share in the previous year. Our operating performance was largely influenced by our growth investments, inflation, and rising interest rates. We are increasing the number of turnaround properties and expansions in our communities. While these projects will lead to greater income growth in the long run, they currently require additional capital for improvements and expenses. We continue to see strong demand in our communities, which should result in higher occupancy and revenue as we fill our inventory. The demand at the property level, alongside expected improvements in our operating results, has led management and the Board to boost our dividend for three consecutive years by a total of 13.9%. Starting in 2023, we raised our quarterly dividend from $0.20 per share to $0.205 per share, reflecting an annualized dividend of $0.82 and an increase of 2.5%. We believe we are positioned for future dividend increases as we carry forward with our long-term business strategy. Turning to operations, total income for the year rose by 5% to about $196 million. This uptick was driven by a 7% rise in rental and related income, while sales of manufactured homes saw a 6% decrease. Rental and related income reached $170 million for the year. Our operating expense ratio increased to 44.4% from 42.8% in 2021, resulting in community net operating income of about $94.8 million, a 4% increase from last year. Same property income grew by 6%, with same property net operating income rising by 3% or $2.7 million. These same property results were affected by higher expenses due to inflation and limited revenue growth caused by supply chain delays in obtaining new rental homes. Demand remains strong for both sales and rentals across our portfolio. In the past year, we added 392 homes to our portfolio, bringing our total to approximately 9,100 rental homes. Our rental home occupancy rates persisted at a solid 93.3%, and the average monthly rent per home rose by 5.9% to $873. New rental homes enhance our communities' appearance and signal to residents, appraisers, government officials, and investors that we are committed to investing in and upgrading our assets. Our rental home portfolio mainly consists of new homes under ten years old, and our average expense per rental unit is about $400 annually. We have about 30% turnover in rental units each year, with low turnover costs. In the first half of the year, we faced challenges in securing homes from manufacturers. However, we are pleased to share that the backlog has eased, and we now have over 1,000 homes delivered to our communities, currently in various stages of setup. Strong demand exists, and we expect to sell or rent these homes once we obtain occupancy certificates. Occupying these homes will boost revenue while reducing interest expenses from floor plan financing. We are progressing in gaining acceptance from tenants, lenders, and shareholders regarding our rental units. Our rental homes elevate the community's quality, enhancing the value of all homes and the community itself. Fannie Mae has collaborated with us to provide financing not only for communities but also for the rental homes and the revenue they generate. In 2020, we secured a $106 million credit facility at a 2.62% interest rate. These communities previously could not qualify for GSE financing due to the revenue from rental homes. In March 2022, we expanded this credit facility by adding $25 million for rental homes. Later, in September 2022, we completed a second financing with Fannie Mae, which included rental homes as collateral, amounting to a $34 million loan with about $4 million secured by the rental units. Our capacity to secure financing on rental homes reinforces our business plan and allows for further investment in additional communities and more homes, supporting our social mission of providing quality, affordable housing. We are also exploring additional lines of credit with other lending partners to obtain financing on rental homes under favorable terms. Our sales operation is performing well. While our sales decreased by 6% for the year, we are pleased with the results considering that 2021 was our highest sales year, achieving $27.1 million. In contrast, 2022 marked our second highest sales year with $25.3 million. The shortages in inventory throughout most of the year only add to the significance of these results. Despite a decrease of $1.8 million in gross sales, our sales in 2022 generated $2 million in income, consistent with the income from 2021 due to an increase in gross profit percentage from approximately 26% last year to 31% this year. We sold a total of 301 homes, including 144 new homes. The average price for new home sales was $120,000, while the average price for used homes was $52,000. Approximately 63% of our home sales are financed, and we have $64 million in home loans on our balance sheet at an average interest rate of 6.7%. We continued to advance our growth plan by acquiring seven communities with around 1,500 developed homesites at a blended occupancy rate of 66%. The acquisition cost was $86 million, approximately $58,000 per site. These are value-add acquisitions that should become accretive as we renovate the communities, fill vacant sites, and generate sales profits. Moreover, we launched our Opportunity Zone Fund, which provides capital for land development and value-add communities while reducing the initial impact on funds from operations. We are optimistic that rising interest rates may create acquisition opportunities at reasonable prices. We also developed 225 expansion sites, which will help drive sales growth and improve operating margins in our communities due to the fixed nature of most community expenses. We estimate that in 2023 we will receive entitlements for over 800 sites and complete the development of 400 sites. Our greenfield development joint venture with Nuveen is progressing well. In late 2021, we acquired Sebring Square in Sebring, Florida, a brand-new community with 219 sites and excellent amenities like a clubhouse, swimming pool, bocce ball, pickleball, dog park, fitness center, shuffleboard, and TTI. We are working to install and fill this community with homes for sale and rent. We closed on the acquisition of Rum Runner, also in Sebring, at the end of 2022. This new community features 144 sites and similarly has great amenities. The joint venture enables us to develop top-tier communities while minimizing negative earnings impacts. We retain a 40% stake in the joint venture and earn management fees and a promotional percentage, along with plans to purchase these communities when the joint venture opts to sell. We are assessing additional opportunities in our pipeline and look forward to expanding this venture further. As one of the largest operators of manufactured housing communities in the country, we own a portfolio of 135 communities with 25,700 developed homesites. Our partnership with Nuveen Real Estate adds two more communities with 363 developed homesites. In recent years, our investments in value-add communities and expansions have started yielding positive financial outcomes. We have diversified our portfolio by entering markets in Alabama, South Carolina, Georgia, and Florida. Out of our 25,700 homesites, 84.2% are occupied, leaving roughly 4,000 vacant sites. Additionally, we possess 2,100 acres of vacant land adjacent to our communities, which can be developed into 8,400 sites. The year 2022 faced challenges from backlogs in acquiring rental homes and inventory for sale. We have over 1,000 homes in various setup stages, and once occupied, these homes are projected to generate an additional monthly revenue of $900,000, totaling $10.8 million annually. In 2023, we plan to increase our rents by 5%, contributing an extra $8 million in revenue. With a 40% expense ratio, same property community net operating income is expected to rise by $11 million in 2024. Additionally, home sales may increase by 20% to $30 million, with over $1 million in increased sales profits. Our long-term business strategy provides a pathway for robust income and occupancy growth in the future. Our vacant sites and land for expansion present the company with options in desirable locations, which should lead to improved rental occupancy and increased sales. We have successfully positioned UMH for future earnings growth through the implementation of our business plan. Anna will now provide you with more detailed insights into our quarterly and yearly results.

Anna Chew, Executive Vice President and Chief Financial Officer

Thank you, Sam. Funds from operations, or FFO, was $10 million or $0.18 per diluted share for the fourth quarter of 2022, compared to $10.1 million or $0.20 per diluted share for the prior year period. Normalized FFO, which excludes non-recurring items was $11.3 million or $0.20 per diluted share for the fourth quarter of 2022, compared to $11 million or $0.22 per diluted share for 2021. For the full year 2022, FFO was $28.5 million or $0.51 per diluted share, compared to $39.1 million or $0.83 per diluted share for 2021. Normalized FFO was $46.8 million or $0.85 per diluted share for 2022, compared to $41.1 million or $0.87 per diluted share for 2021. Our operating results were largely impacted by our investments to grow the company through value-add acquisitions and developments, inflation, and rising interest rates on our short-term borrowings. Rental and related income for the quarter was $43.7 million, compared to $40.7 million a year ago, representing an increase of 7%. For the full year, rental and related income increased from $159 million in 2021 to $170.4 million in 2022, an increase of 7%. These increases were primarily due to community acquisitions, the addition of rental homes, and an increase in rental rates. Community NOI increased by 2% for the quarter from $23.7 million in 2021 to $24.3 million in 2022. For the full year, community NOI increased from $91 million in 2021 to $94.8 million in 2022, an increase of 4%. Sales of manufactured homes for the quarter decreased 5% year-over-year from $5.3 million in 2021 to $5 million in 2022. For the full year, sales decreased 6% from $27.1 million in 2021 to $25.3 million in 2022. We sold a total of 301 homes in 2022, as compared to 370 homes in 2021. There were 144 new home sales, compared to 182 homes in 2021. The company’s average sales price was approximately $84,000 in 2022, as compared to $73,000 in 2021, resulting in a 15% increase. The gross profit percentage increased by 5% from 26% in 2021 to 31% for 2022. As we turn to our capital structure, at year-end we had approximately $762 million in debt, of which $509 million was community-level mortgage debt, $154 million were loans payable, and $99 million was our newly issued 4.72% Series A bond. 80% of our total debt is fixed rate. The weighted average interest rate on our mortgage debt was 3.93% at year-end, compared to 3.75% at year-end last year. The weighted average maturity on our mortgage debt was 5.1 years at year-end and 5.2 years last year. As we previously announced on July 26, 2022, we redeemed all 9.9 million shares of our 6.75% Series C perpetual preferred stock for a total of $247 million. This redemption was completed by utilizing funds raised through our common ATM, our Israeli bonds offering, and mortgage debt. We are very proud to have been able to complete the recapitalization of our Series C preferred in a difficult economic environment. We opportunistically raised capital throughout the year to ensure that we have the capital available at rates and prices we were comfortable with to drive future earnings growth. At year-end, UMH had a total of $225 million in perpetual preferred equity. Our preferred stock, combined with an equity market capitalization of $927 million and our $762 million in debt, results in a total market capitalization of approximately $1.9 billion at year-end. During 2022, we successfully completed and oversubscribed bonds offering, raising $102.7 million with net proceeds of approximately $98.7 million. The transaction was completed in Israel, which afforded us some distinct advantages. Despite rates increasing during the process, we obtained a favorable rate of 4.72%, which is unsecured with a term of five years. Completing the offering included going through the process of obtaining a rating from S&P in Israel, which rated the bonds AA minus and UMH A plus at the corporate level. We also completed the addition of approximately 1,100 rental homes to our Fannie Mae credit facility for total proceeds of approximately $25.6 million. This is the first time that the GSEs have financed rental homes and communities that are not entirely comprised of rental homes. Subsequently, in conjunction with a new $34 million mortgage, we added another tranche of 250 rental homes to this facility for total proceeds of $4.1 million. We have approximately $423 million of rental homes on our balance sheet that may now qualify for highly competitive financing, providing us an important source of capital going forward. During the year we sold 5 million shares of common stock through our common ATM programs at a weighted average price of $20.58 per share, generating gross proceeds of $102.6 million and net proceeds of $100.8 million after offering expenses. Subsequent to year-end, we sold approximately 1.9 million shares of common stock under the common ATM program for gross proceeds of $32.7 million. Additionally, we sold 406,000 shares of our Series D Preferred Stock through our preferred ATM program at a weighted average price of $22.90 per share, generating gross proceeds of $9.3 million and net proceeds after offering expenses of $9.1 million. Subsequent to year-end, we entered into a new $100 million ATM program and sold 640,000 shares of preferred stock under our preferred ATM program for gross proceeds of $14.6 million. On November 7, 2022, we entered into the second amended and restated credit agreement with BMO Capital Markets and JPMorgan Chase Bank. This amended and restated credit agreement increases our credit facility to $100 million with a $400 million accordion feature, subject to certain conditions, including obtaining commitments from additional lenders. This agreement also extends the maturity date to November 7, 2026, which may be further extended at our option for an additional year. This new agreement enhances our liquidity and financial flexibility, allowing us to continue to execute our business plan. To further increase our flexibility, on February 24, 2023, we increased this facility to $180 million. From a credit standpoint, our net debt to total market capitalization was 38.2%. Our net debt less securities to total market capitalization was 36%. Our net debt to adjusted EBITDA was 8.1 times. Our net debt less securities to adjusted EBITDA was 7.7 times. Our interest coverage was 3.1 times and our fixed charge coverage was 1.7 times. From a liquidity standpoint, we ended the year with $29.8 million in cash and cash equivalents and $25 million available on our credit facility, with an additional $400 million potentially available pursuant to an accordion feature. We also had $19.4 million available on our revolving lines of credit for the financing of home sales and the purchase of inventory and $14.9 million available on our line of credit secured by rental homes and rental home leases. Additionally, we had $42.2 million in our REIT securities portfolio unencumbered. This portfolio represents approximately 2.5% of our undepreciated assets. During 2022, the Monmouth merger with ILPT was completed at $21 per share. UMH owned approximately 2.7 million shares of Monmouth and received approximately $55.7 million. We are committed to not increasing our investments in this REIT securities portfolio and have in fact sold certain positions. We are well-positioned to continue our growth initiatives.

Eugene Landy, Founder and Chairman

Manufactured housing and land lease communities are the best way to provide quality, affordable housing for our nation. Fannie Mae estimates that there is a 4-million-unit shortage of housing and that shortage is increasing on an annual basis. Furthermore, higher interest rates are resulting in fewer housing starts. Housing starts in 2023 are expected to be down 100,000 units or more. Additionally, most of the housing starts don't cater to the affordable end of the market. Manufactured housing has the potential to increase our market share and help to provide the nation with much-needed affordable housing. UMH is well positioned to execute on our mission of providing the nation with quality, affordable housing. We have invested in value-add communities with deferred maintenance and made improvements that allow us to provide desirable housing in each market we operate in. We have expanded our communities and have over 21,100 acres for the development of additional homesites. We are building new communities through our joint venture with Nuveen Real Estate and expect our new communities to be well received by municipalities, allowing us to obtain additional entitlements in the future. We have and will continue to play our role in addressing our nation's housing shortage. Our results in 2022 were impacted by the lack of new rental homes coming online because of supply constraints and increased costs related to inflation and value-add acquisitions. It appears that we have passed the supply constraints and are back on track to achieve our annual goal of filling at least 800 rental units. As we are able to fill these units, our revenue growth will offset our expense growth and result in higher earnings for our shareholders. Additionally, our sales profits should continue to improve. Despite the challenges we faced in 2022, UMH had a year of many accomplishments and is well positioned for future growth.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Gaurav Mehta with EF Hutton. Please go ahead.

Gaurav Mehta, Analyst

Thanks. Good morning. I wanted to ask you about your operating expenses. In your remarks, you mentioned that revenue is expected to exceed expense growth, with revenue growth projected at 8% to 9%. Should we expect your expense growth to be lower than 8% to 9% going forward?

Samuel Landy, President and Chief Executive Officer

Yes. So this year, for the full year, on a same-property basis, our expenses were up 10.2%. The real drivers of that expense growth were our payroll up about 7.5%, waste removal was a significant item up over 15%, tree removal insurance, which are large items, and real estate taxes. We do not expect the growth that we saw in those items this year and we do expect our expense growth to normalize in that 6.5% to 8.5% range. So we should be able to drive income growth above that. Regardless, even if we are in that 8.5% range, NOI growth will still be high single digits. But obviously, if we are able to reduce expenses further or grow revenue faster, those numbers can improve.

Gaurav Mehta, Analyst

Okay, great. Can you maybe provide some color on what you're seeing in the transaction market for stabilized and value-add acquisitions?

Samuel Landy, President and Chief Executive Officer

Yes, there aren't many deals trading right now. There are several deals up for sale, but the pricing isn't matching what you'd expect in this market. We’re seeing a lot of breakeven or negative spread deals. For quality properties, cap rates are still in the range of 4.5% to 6%. However, the cost of debt is around 6%, and our cost of equity has increased as well. We are searching for accretive opportunities, but there isn't much available currently. Some value-add deals are out there, but we are focusing on the acquisitions we have completed and working to bring them online and make those accretive. Once they are set, we can then look into investing in more value-add opportunities.

Gaurav Mehta, Analyst

Okay, thank you. That's all I had.

Operator, Operator

Our next question comes from Rob Stevenson with Janney. Please go ahead.

Robert Stevenson, Analyst

Good morning, guys. Rental occupancy was down right around 100 basis points quarter-over-quarter. Was this just a timing issue with the new deliveries or any notable trends that you guys saw in rental unit demand in the fourth quarter?

Samuel Landy, President and Chief Executive Officer

Yes, rental occupancy is generally seasonal as is our sales business and everything else. And COVID did allow us to remain a little bit higher in the fourth quarter over the past two years and this year it did decrease down to 93.3%. That's actually what we would expect for that time of year. So we are working on turning those units over, getting them occupied. We're through tax season and we're coming into our peak season for rental. So that will allow us to rent those vacant units out and also expedite the infill of our units, which are really coming online at the right time, which should allow us to grow pretty quickly here moving forward.

Robert Stevenson, Analyst

Okay. And then can you talk about the pace of lease-up at the two Alabama assets or the two South Carolina assets. Looks like occupancy increased pretty hefty 340 basis points in Alabama and 130 in South Carolina. Are you happy with those paces? Can you go faster? How should we be thinking about those assets in particular over the course of ‘23?

Samuel Landy, President and Chief Executive Officer

Yes, those assets. And again, it really had to do with our inventory problem at the beginning of last year and the inability to get inventory. We closed on those acquisitions at the beginning of 2021, and that's really when the supply constraints impacted our ability to execute our business plan. So for the first year of ownership, we really did not have many new homes coming into those properties. But now that we have the homes, we are starting to see significant occupancy gains. We do expect the South Carolina property to be full by the end of this year and Alabama won't quite be full, but it should be up into that 70% to 80% range, potentially better, but it's all based on demand.

Eugene Landy, Founder and Chairman

Samuel, it’s an important time to note, we have 1,000 homes delivered. So that's higher than our normal inventory we'd expect to have by far. We're getting through supply chain issues in terms of completing setup. But as these homes are set up, we're going to assume we continue at the 8:1 ratio of eight rentals per every one home sale and we believe we will fill 800 of these homes during the course of the year as rentals at better than $10,000 revenue per house, and we will sell the 200 homes at higher sales prices and higher sales profits. It appears to me, it's a better time than ever to be in the business we're in, which is manufactured housing, rehabilitating communities, because those rehabilitated communities have extremely strong demand to increase sales profits and revenue growth through the rental homes. So we think we're in an extremely strong position going into 2023.

Robert Stevenson, Analyst

Okay. And speaking of the home sales, where are you guys offering financing today on new home sales and is very many people taking up the financing or is it almost all cash buyers at this point given where rates have moved to?

Samuel Landy, President and Chief Executive Officer

Our rates are currently at 7.5% and last year we financed about 62% of our home sales. I would expect that to be about the right percentage moving forward.

Anna Chew, Executive Vice President and Chief Financial Officer

Right, that's for new homes and for used homes, that rate is 9.99%.

Robert Stevenson, Analyst

Was that 62% heavily front-end weighted or was that ratably throughout the year? So fourth quarter wasn't much different than earlier in the year when interest rates were much lower?

Samuel Landy, President and Chief Executive Officer

It generally hangs around that 60% mark throughout the year.

Robert Stevenson, Analyst

Okay. And then Sam, didn't realize you were switching, just one analyst opinion, but I have to say that trading Springsteen for Taylor Swift on the call music was a notable downgrade this quarter. So, alright, guys. Thanks for the time.

Samuel Landy, President and Chief Executive Officer

UMH is doing substantial work in Nashville. So we're broadening our musical horizon.

Robert Stevenson, Analyst

Well, you bought a New Jersey asset this year, so go back to Springsteen.

Samuel Landy, President and Chief Executive Officer

Very good. Very good.

Operator, Operator

And our next question comes from Craig Kucera with B. Riley Securities. Please go ahead.

Craig Kucera, Analyst

Yes. Hi, good morning, guys. I think you mentioned last quarter, you had 700 homes delivered. This quarter we're looking at closer to 1,000 or over 1,000. As we think about that, are you anticipating that those get deployed as rentals ratably throughout the year? Or is there a potential for an acceleration there given that the inventory is there and then hand after being quite light for quite some time due to COVID?

Samuel Landy, President and Chief Executive Officer

So the UMH team does an incredible job getting these homes setup, marketed, and rented and we view ourselves in a race. The faster we rent and sell the home, the better for the 2023 year. We have no doubt the majority of them will be occupied on time for the 2024 year, but the sooner we get them occupied for 2023, the greater our revenue growth and the more we will reduce our expense ratios. So there are hold-ups. We have to wait for electric companies, gas companies to do their part in setting up these houses. But in terms of the manufacturers got us the houses, we're doing everything in our power to have them set up and ready to rent and sell. And our first two months of the year indicate that sales are growing and rental occupancy is growing, and that we are on target to in fact fill these 1,000 units.

Craig Kucera, Analyst

Okay, great. Changing gears, Anna, you added amortization of debt financing costs and FFO this quarter. Are you planning going forward to include that or was this just more for ‘22?

Anna Chew, Executive Vice President and Chief Financial Officer

We plan to include it, because we did change the way we capitalized our company. In the past, we used primarily preferred stock, and the offering costs on the preferred stock is not added. It's not subtracted from normalized FFO, but when you use debt, it is subtracted. So we just added it back just to be consistent. So we will continue to add it back.

Craig Kucera, Analyst

Got it. And kind of in the same vein, I think you have about $60 million of mortgages maturing this year. I think they are about 3.8%. What are your expectations? Are you looking to refinance those in the market or are you looking at other sources of capital? I guess, what are your thoughts there?

Anna Chew, Executive Vice President and Chief Financial Officer

Well, out of the $60 million, $44 million, I believe has already been repaid. So we have $44 million that is additional free and clear properties. Right now we intend to put it into our line of credit, because we did increase our line of credit from $100 million to $180 million. We wanted the financial flexibility of having that, so that's why we did it that way.

Operator, Operator

Your next question comes from Jay McCanless with Wedbush Securities. Please go ahead.

Jay McCanless, Analyst

Hey, good morning to everyone. So for the last four quarters, Indiana and Pennsylvania, which I think are just under 50% of the sites that UMH has, they have underperformed in terms of same-store rent growth relative to the average that the company is putting up. Is there any thought to either trying to push rents a little harder in those markets or potentially divest some properties where you can get the rental growth up to where the rest of the company is?

Samuel Landy, President and Chief Executive Officer

We see the rents going up and the occupancy going up. Go ahead, Brett.

Brett Taft, Executive Vice President and Chief Operating Officer

Yes, yes. No, so Indiana and Pennsylvania, looking at them, expense growth was a little bit elevated. So, that's certainly something we're keeping in mind, but we do believe that that expense growth will normalize this year and come back down into that 6.5% to 8.5% range that I mentioned earlier. Again, a big part of our portfolio now is obviously rental homes and we did have some seasonal rental home occupancy fluctuations and we're working on getting those units back online. We also have a lot of new homes being delivered to those properties. So we will carefully monitor the situation and we do believe that our rental revenue growth will go back in line with our expectations, but they did have a little bit of a down year.

Samuel Landy, President and Chief Executive Officer

I’ll add to that. Some of our capital expenses for 2023 will include work on water and sewer lines and water and sewer plants. We have seen returns on those capital improvements of as much as 20% per year as we reduce water and sewer leakage. These are expenses that can be reduced through capital improvements. When we consider the biggest issue we faced in 2022, it was the lack of inventory. We were unable to add 800 rentals before 2022, which hindered the income growth we typically experience. If we had achieved that income growth, it would have offset the expense increases, resulting in high single-digit to double-digit increases in operating income. Whether we will see those kinds of results in 2024 or 2023 depends on how quickly we can fill these 1,000 units, but if we can do it quickly, it will be 2023.

Eugene Landy, Founder and Chairman

Our policy is taking a long-term view. I don't understand why would sell a product, going up in value every year and that the demand is there. There is a tremendous housing shortage everywhere in the United States. The Governor of New York announced there's an 800,000-unit shortage of affordable housing in New York. New York State is requiring 80,000 homes a year to be built. Our experience with the Florida market is very, very favorable. The demand there and the future for the affordable housing, manufactured housing is excellent everywhere in the country. Our goal, we are very proud of the fact that we've got up to 25,000 sites and we are up to 9,000 rental homes and we plan to grow the company and increase the size of the company over the next decade.

Jay McCanless, Analyst

So where are the majority of those 1,000 homes going to be sited?

Brett Taft, Executive Vice President and Chief Operating Officer

Yes, hold on one second. So we've got 50 homes in Alabama, 100 in Florida, which is really through the joint ventures. So we can subtract that from the total, but 168 in Indiana, 93 in Michigan, only five in New Jersey because occupancy is so high. New York 43, Ohio 317, Pennsylvania 262, South Carolina 19, and Tennessee 94. So as you would expect, heavily weighted towards where we own the most of our assets in Ohio, Pennsylvania, and Indiana. But a good amount of homes going into our new expansions in Tennessee as well.

Jay McCanless, Analyst

Got it. I guess to get in the weeds a little bit, Anna, could you talk about what you think your cost of equity is because there was heavy reliance that you all had on the ATM last year and even to start this year. It's hurting, kind of, your headline FFO and just wondering if the cost of this new credit facility is going to be a little more advantageous relative to where you think your cost of equity is and maybe allow UMH to be less reliant on the ATM in ’23?

Anna Chew, Executive Vice President and Chief Financial Officer

Currently, our dividend on common stock is under 5%, while the preferred stock dividend is at 6.375%. Our mortgages carry a weighted average rate of about 3.93%, and our bonds are at 4.72%. The new facility operates at SOFR plus or minus a range determined by our debt-to-assets and liquidity ratios, which we estimate to be around 6%, specifically about 5.6%. Thanks to our new BMO line, we have the option to reduce our reliance on the ATM, but that will depend on our stock price and capital requirements. If we encounter significant acquisition opportunities, we will need to secure funding, which will also influence our capital needs and stock price considerations.

Eugene Landy, Founder and Chairman

If I can add to that, Anna. Historically, when considering the cost of capital, inflation must be factored in. This company has often borrowed money at rates of 7% or 8% and generated returns significantly higher than that. With the current inflation rate in the country exceeding 6%, as mentioned in previous presentations, expenses are rising by 7% to 8% in the housing sector. As long as we're able to borrow at 7% and manage through inflation, the real cost of capital could effectively be around zero, one, or two percent. Provided we maintain a long-term perspective and avoid liquidity issues, our cost of capital should consider inflation.

Jay McCanless, Analyst

Got it. Thank you. And then the last question I had, is there a case to be made for stopping the acquisitions until you can stabilize the assets that you've already brought on-board. I don't know if those two are independent of each other, but it would seem to at least in the near term get some of these assets stabilized, especially if you're trying to get 1,000 homes site, does it make sense to hold off on new acquisitions to get those homes and some of these newer acquisition parks up and running?

Samuel Landy, President and Chief Executive Officer

Well, we do always evaluate the impact acquisitions will have on FFO, and we do turn down large portfolios, strictly because they would negatively impact FFO. We're very happy with the acquisitions we did the past year. We hope that in the next few quarters we will be reporting to you accelerated rent growth probably beyond what people expect on both the rent and the sales income. And if that occurs, we're certainly going to want to do more of what we're doing. But at this moment, we do agree. We have plenty to do. We have 4,000 vacant sites. We have 1,000 homes in inventory. We have plenty of ways to grow revenue and income right at this moment and don't necessarily need acquisitions to do that.

Eugene Landy, Founder and Chairman

We will pursue acquisitions if we can secure long-term patient capital, and we take pride in our joint venture. We are working to have our securities labeled as social. If we can establish ESG cash utilization for our preferred or common stock, we believe some institutions may provide us with long-term patient capital. We are developing the OZ fund, which we hope Congress will offer special tax treatment for investments in opportunity zones that create affordable housing. This will enable UMH to access long-term patient capital. The demand is significant, with every 1,000 sites requiring $100 million and another $100 million for each additional 1,000 homes. The need extends into millions of homes. We aim to fulfill our mission statement, but we will only proceed if we can succeed in these major projects, which we have been working on for several years and are making progress with. We anticipate announcements this year regarding changes in the OZ fund, the classification of our securities as social, and an expansion of our joint ventures.

Jay McCanless, Analyst

Okay, that's all I had. Thank you for taking my questions.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Samuel Landy for any closing remarks.

Samuel Landy, President and Chief Executive Officer

Thank you. I want to mention Steve Feglie, who is with UMH for 33 years, passed away suddenly in his sleep last week. Steve was 56 years old and married for 15 years. Steve was the trusted assistant of Jeff Wolfe, our Senior Vice President of Operations. To Steve, there was no such thing as an obsolete home, because he could single-handedly rebuild any home to better than new in less than two weeks. He plowed snow through the night, fixed water lines and flooded ditches in January, and was a tremendous part of the UMH team. Steve was six foot four inches tall, weighed 220 pounds of solid muscle, had a 36-inch waist and measured 48 inches shoulder to shoulder. He was big as a bear and gentle as a kitten, and he will be greatly missed by all of us. So thank you, operator. I'd like to thank the participants on this call for their continued support and interest in our company. As always, Gene, Anna, Brett, and I are available for any follow-up questions. We look forward to reporting back to you in May with our first quarter 2023 results. Thank you.

Operator, Operator

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